Global stocks show new unease

(AFP: London, July 12) Global equities are falling as US banks prepare their latest earnings, throwing doubt on a swift recovery for the world economy following the worst downturn since the 1930s.

Investors are dumping shares as optimism fades that the worst of the global recession is over and markets brace for a string of corporate results -- particularly from the troubled banking sector in the United States.

"Optimism around the pace and timing of economic recovery... has latterly been replaced by a collective sense of unease," said Richard Hunter, analyst at Hargreaves Lansdown stockbrokers.

Following the publication this month of poor US jobs data, investors are turning their attention to crucial second-quarter results from battered American banks Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup.

"There are concerns surrounding the extent of any recessionary writedowns, which will replace the credit crisis writedowns already suffered," Hunter said.

The main European equity markets have endured a rollercoaster ride this year, plumbing multi-year low points in March as the spreading global recession tightened its grip.

However Frankfurt, London and Paris went on to soar by 30-40 percent in value by the end of the second quarter, as investor optimism over a tentative global economic recovery gathered pace.

Markets worldwide were propelled higher on the growing belief that the world was witnessing precious "green shoots" of fragile recovery.

But shares have since tailed off as investors worried about the smoothness of recovery.

"There was a good reason for the rally -- the banking system did not collapse as it looked like it would," said David Morrison, an analyst at financial spread-betting firm GFT.

"Governments stepped in... (and saved) banks and financial institutions like (US insurer) AIG. Once this protection was in place, then informed investors effectively had a cheap call option on stocks -- banks in particular.

"But the rally is now overdone as investors jumped in expecting a V-shaped recovery which won’t materialise."

The world economy was slammed in August 2007 by the collapse of the US subprime or high-risk home loan market -- which sparked an international credit crunch as banks fretted about their exposure to toxic assets.

The second phase of the global economic and financial crisis came in late 2008, as leading economic were dragged headlong into recession.

"I do not think we have seen just a blip up in global equities -- the rally post-March was a realisation that the global financial world was not going to end," agreed Manus Cranny, a markets commentator at MF Global Spreads.

"As apoplectic fear dissipated, a relief rally ensued. Stimulus programmes were implemented and zero interest rates were put in place -- and perceived to be there for some duration."

Over the past two years, many of the world’s richest nations have pumped billions of dollars in stimulus spending programmes and via money markets in a bid to stabilise the world financial system.

At the same time, many Western nations have also rescued -- and in some cases nationalised -- leading commercial banks that were toppled by exposure to toxic debt.

"We have had Credit Crunch 1 which was August 2007 and Credit Crunch 2 which came in September-October 2008," said Cranny.

"Where we are now is a slow, malign and rather perverse recession.

"The bank bailouts have worked to an extent in terms of balance sheet and liquidity ratios that allow the banks to live -- and not necessarily grow," he added.

Hunter meanwhile forecast that world stock markets could strengthen towards the end of the year -- provided there was sufficient evidence that the global economy was truly on the mend.

"The general consensus is that the economic recovery could be somewhat weaker than hoped -- and it may not come through until next year," he said.

"There could potentially be some strength returning to the markets before the end of the year, but this very much will depend on the economic and corporate news in the meantime."

Source: Gorkhaptra